Working Paper: NBER ID: w10565
Authors: Paul Beaudry; Fabrice Collard
Abstract: This paper examines the extent to which the process of globalization can explain the observed widening in the cross--country distribution of output--per--worker. In particular examine whether the opening up of trade in a Hecksher--Ohlin type model of trade can explain the observed changes. On the theoretical front the model highlights that, when the labor market is subject to a holdup problem, then the opening up of trade can cause an increase in the dispersion of income across countries similar to that observed in the data due to the emergence of a discrepancy between the private and social returns to capital accumulation that favors capital abundant countries. On the empirical front, we document the relevance of the model by examining whether growth patterns, decomposition exercises and specialization patterns support the model's predictions. Overall we find that over 50% of the recently observed increase in income dispersion across countries can be accounted for by the mechanism exemplified by the model.
Keywords: Globalization; Income Distribution; Trade Theory; Capital Accumulation
JEL Codes: O33; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Globalization (trade opening) (F69) | Increased income dispersion (D31) |
| Capital accumulation (E22) | Increased income dispersion (D31) |
| Globalization (trade opening) + Capital accumulation (F62) | Bimodality in income distribution (D31) |
| Capital accumulation patterns (E22) | Sensitivity of output per worker (E23) |
| Returns to capital accumulation vs. changes in capital-output ratios (E22) | Changes in income distribution (D31) |